Wednesday, 29 June 2016

In his defence of the
EU the Oxford economist Simon Wren-Lewis recently made a number of interesting claims that directly relate to the general debate on the benefits, or
otherwise, of immigration, globalisation and free trade. One that stands out is
this in response to Kate Hoey's claim that migration has been used to suppress
the wages of the low paid:

"She seems to be arguing that free movement in the EU is a means of
keeping down the wages of the low paid. The first point to make is if labour
mobility keeps wages down in the destination country, it should increase wages
and/or reduce unemployment in the country the migrant came from. As migrants
move from lower to higher wage countries, then migration tends to equalise
incomes. This should normally count as a plus from a left wing perspective."

Well it is certainly
true that migration reduces unemployment in the country of origin. It is also
true that migrants tend to repatriate a portion of their earnings to their
country of origin and so help to increase
its GDP per capita and thus increase its overall prosperity. In theory this
should help to close the gap in inequality between rich countries and poor ones,
and thereby "equalise incomes".

One could also then argue that once the
poorer countries have attained a sufficient level of income, they will also be
able to trade with richer countries as equals, in effect increasing the size of
the market accessible to firms in both countries. This is the essence of current
globalisation policy and is one reason for the EU's policy of continued expansion.
It is therefore certainly true that it could be claimed to be "a
plus from a left wing perspective" in that it raises living
standards and reduces inequality in the poorer country. As such it probably
does the same globally as well. The problem is that it doesn't do so in the
richer country.

In the richer country most
of the immigration will be into low paid jobs, and much of the earned income that
results will leave the country. This will have two negative effects on
aggregate demand in the rich country. Firstly, it will force down wages of the
low paid through increased competition; secondly, the additional economic
activity that results from the immigrant workers will be exported and so will
not be used to stimulate extra demand (a multiplier effect) to replace that
lost through job losses and earnings reductions of the existing low paid
workers. On top of that the population will have increased so GDP per capita
will be reduced.

Now it is probably
true that once the economies of the two countries have equalised both countries
will benefit fully and equally from the larger market available to them. The question, though, is how long will this
take? As Keynes famously put it, "In the long run we are all dead."
The point he was making when he said it was that time is not infinite and
people are not immortal. After a recession or depression the economy will
inevitably recover eventually. The argument of classical economists is that, if
the economy is going to recover anyway, then it doesn't need any government
intervention to help it along. The argument Keynes was making was that ordinary
people can't wait that long and therefore the recovery needs to be brought
about as soon as possible through active interventionism, rather than arriving
at some unspecified later date because of passive liberalism. That same statement
can also be applied to the effect of immigration on the poor in developed
countries. How long must they wait for the benefits of migration to bear fruit?
Until after they are all dead?

The reality is migration
is just another manifestation of globalisation policy and both have been
exploited and abused to suppress wages in developed countries because that is
how western governments have managed to deliver economies that simultaneously
have low inflation and low interest rates. That is why living standards in most
developed countries have stagnated for the bottom 50% over the last 30 years. In
which case I would argue that Kate Hoey is correct in her viewpoint and
Professor Wren-Lewis is wrong. Moreover, I would argue that an economic policy
is only beneficial and equitable if those that sacrifice the most in the short
term also benefit the most in the long term. That after all is one reason why
most on the left reject austerity. But if migration hurts the poor in the UK
and benefits the rich, how is this "a plus from a left wing
perspective"? And of course the adverse side effect of all this
of course is massive wage inequality in the rich countries, excess savings by
the rich, low investment and asset price booms. Ultimately that is why we are
in the mess we are in now.

"Migrants tend to be young, healthy and working. They provide more in
terms of resources than they take out by using public services. I remember
having a conversation about this with someone who lived in Spain. He said if
anyone should be angry about free movement it is Spain, in having to take lots
[of] non-productive British pensioners who will be a burden on Spain’s health
service."

This argument also
contains a number of major flaws in its reasoning. Firstly, it neglects to take
into account the fact that most of the UK pensioners that have moved to Spain
have done so on large pensions. These pensions are paid out in the UK by
insurance companies and the government but spent in Spain. Therefore not only
does this constitute a massive export of capital from this country, it also
leads to an equally massive loss of both consumption and taxation in the UK.
This loss of government revenue far exceeds any burden those pensioners would
place on the NHS if they were to return to the UK. The UK therefore loses from
this arrangement and Spain gains.

Secondly, the argument
fails to take account of my previous point, that migrants tend to repatriate a large
portion of their earnings to their country of origin. As a result any increase
in economic activity that results from the immigrant workers will be exported
and so will not be used to generate extra demand in the UK. In short there will
be no multiplier effect that would create additional jobs to compensate for the
immediate effects of immigration.

What this shows is
that it is not just inward migration that can hurt the UK economy, but also
outward migration. Both have negative effects on our budget deficit and our
trade deficit. And as I have argued previously, both therefore represent an
existential threat to the solvency of the national government and therefore
ultimately to the democracy of the UK, because if a Labour government cannot
fund its programmes, then there can be no Labour government. In short we end up
like Greece.

"Corbyn is also delusional if he
thinks effective Keynesian fiscal policy will be possible in Britain with an
open border policy, for the more prosperous a country becomes, the more it will
simply become a magnet for mass immigration from Europe, which in the process
will defeat the whole purpose of fiscal policies to create full employment."

In other words full employment is impossible if you have an open borders policy. And what is the point of a Labour Party that doesn't believe in full employment?

Thursday, 23 June 2016

According to virtually every major
economics organisation (IMF, OECD, IFS, BoE, The Treasury) the EU is such an
enormous benefit to the UK economy that leaving would amount to economic
suicide. Yet despite 95% of mainstream economists supporting the Remain
campaign the public is unimpressed. Why? Well perhaps the reason is this: there
is no definitive data to support their claim.

One of the arguments against Brexit from economists such as Simon Wren-Lewis is that it would make it more difficult for us to trade with
countries next to us and that would hurt our economy. It is the classic neoliberal
free-trade argument even though Wren-Lewis claims to be a New Keynesian. But
no-one who supports Brexit is arguing that leaving the EU is for the purpose of
reducing trade with Europe. Nor can any rational and informed thinker possibly believe that a reduction trade with the EU would be the end result. The lobbying power of the multinationals would ensure that. This then is a spurious argument. The fact that it relies on a contentious, unproven and ideological belief in the universal benefit of free trade makes it even worse.

Another argument put forward is that
because 40% of our overseas trade is with the EU then our future economic growth
will be greater inside the EU than outside. This is the argument put forward by
George Osborne. In addition he and David Cameron have claimed that leaving the
EU would result in a massive recession and a third world war (or both), while our membership of the EU has
delivered greater economic growth than would otherwise have happened. The problem is that claim is untestable because the alternative scenario is counterfactual. That said, we can attempt to test it simply by going back in time.

If we assume that leaving the EU represents the converse process
to joining, then leaving should deliver the converse results of joining. So the question then becomes: what was the
economic consequence of joining the EU? Well the graph below shows the growth rate in
real GDP in the UK over the last sixty years.

If joining the EEC was the economic boon
that the Pro-Europeans claim then there should have been a significant increase in the
growth rate after 1973, yet according to the graph above there was none. Moreover, after the signing of the
Maastricht Treaty in 1992 there should have been a second boost. Again none is detectable. What there is instead is a clear decrease in the amplitude of the fluctuations in growth rate, possibly
in part due to a decrease in the inflation rate over the period in question. To analyse the above data more
clearly it is perhaps better to present it as a plot of real GDP per capita
versus time (rather than growth rate versus time) and calculate the compound
growth rate. This is shown below for the period 1960-1973 covering the period
immediately prior to the UK joining the EEC.

The above data shows that real GDP per
capita rose by a factor of 53% over this period. This equates to an average
growth rate of 3.3% per annum. Now if we look at the period immediately after
joining the EEC we see a different behaviour.

Finally, if we look at the period after the
Maastricht Treaty was signed real GDP per capita grew by 42% equating to an
annual growth rate of only 1.6% per annum.

What all this clearly demonstrates is that
there was no spurt in economic growth after joining the EEC, or after signing
the Maastricht Treaty. In fact in both cases the growth rate went down. So this appears to torpedo the principal claim of the Remain camp that EU membership boosts growth. The reasons of course are easy to understand.

Firstly, over much of the last thirty years the EU has been obsessed with enlargement, and most of the new member states have been economically underdeveloped. It therefore follows that any process of economic convergence must have involved a transfer of economic growth from the old member states to the new ones. This will inevitably have had a negative impact on growth rates in the developed countries. In effect at each level of increasing EU integration the developed countries have effectively exported an increased amount of their economic growth to other countries in the EU.

"Migrants
tend to be young, healthy and working. They provide more in terms of resources
than they take out by using public services."

Well the first part of this
may be true but the second is most definitely not. What Professor Wren-Lewis has conveniently
omitted from his thesis is that most migrants pay little or no tax because most of them are
seasonal workers, and under EU rules, if you work in a country for less than 6 months
you are exempt from income taxes. In addition, most migrants are net savers and
they spend those savings in their country of origin, not here, so there is no
multiplier effect. The result is that they do not create as many new jobs as they take away. The best migration is permanent migration because it is more
likely to involve people with tradable skills, in high income professions who
invest all their earnings in this country thereby creating as many, if not
more, jobs than they take away. On top of this, migration also has a negative impact on investment because employers don't need to train or retrain their existing workers if they can source the necessary skills from elsewhere at zero cost.

The analysis above all seems to have passed by the economics establishment. The big question is why?

Saturday, 4 June 2016

You would be hard pressed to deduce this from the current political mood music but, like the
Conservatives, the Labour Party has always had a pretty ambivalent attitude to
the EU. That much is at least self evident if one looks back at the history of
the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is
that there isnot the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that
there should be because the potential threats posed to our democracy and to the
viability and effectiveness of any future Labour government by the EU (at least
in its current form and with its current direction of travel) are now much
greater than they have ever been.

These threats I
believe are two-fold. The first is economic, the second democratic. The
economic threat comes from the increasingly unviable state of national finances
and taxation frameworks and the negative impact on both of these posed by the
single market. For a government to function effectively it needs to be able to borrow what
it needs when it needs, and it needs to be able to tax who and what it needs in
a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the
EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the
heart of the new EU is the single market. The single market is everything. The
single market is sacrosanct. Nothing will be allowed to interfere with the
single market. That means all government policies will be tested against this
question: do they distort the single market? If so then they will be deemed to
be illegal. We have already seen the start of this trend with the decision of
the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the
spotlight, then VAT. After that it will be corporation tax on companies, and
possibly even income tax. But you don't need the single market or the ECJ to
bring about harmonisation of tax rates: that will happen automatically if we
continue to allow the freedom of movement of people.

The freedom of
movement of people or workers is one of the four pillars of the single market,
the other three being the freedom of movement of capital, goods and services. Implicit
in these is a fifth freedom, the freedom of movement of jobs. Most criticism of
the first of these, the freedom of movement of people, has concentrated on its
effect of immigration. However, there is a secondary impact. If you allow
people to move country then you effectively allow them to choose which taxation
regime they wish to work under. In other words they are able to exercise
consumer choice to choose their tax rate by selecting a country of residence
with as low a tax rate as possible.

We have already seen
the effect of this when President Hollande raised the top rate of income tax in
France to 75%. Many of the wealthy moved to London or across the border into
Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France
for their work if they needed to. Of course if your income tax was dictated by
your nationality and not your country of residence (as is the case for US
citizens) such movements would not be financially beneficial, but of course EU
rules and the single market prevent this.

The impact of all this
will be two-fold. Firstly it will undermine democracy because it will
effectively allow some voters to circumvent the democratic outcome of national
elections. If you don't like the result then you can just move somewhere else. If
your fellow countrymen vote for a socialist government with better public
services and higher taxes on the wealthy, then the wealthy can just move to a
country with lower taxes. The rich get to have their cake and eat it.

The second impact is a
direct consequence of the first. If the voters can move from country to country
in search of the best tax deal, then countries will be forced to compete for
income. This competition will force them to outbid each other in terms of tax
cuts. The net result will be an inevitable race to the bottom in terms of tax
rates. As a consequence the tax gap that governments currently suffer from will
widen, revenues will fall, spending will decline, and services will worsen,
whether these are in social security, healthcare or education.

The one great virtue
of the EU in the eyes of Labour voters and trades unionists has always been the
Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that
the EU should be for the benefit of workers, and not the owners of capital, by
setting common standards for working rights and conditions that multinational
corporations in particular operating in the EU would have to abide by. The rationale
was that individual member states were too small and powerless to implement
these standards unilaterally because multinationals could effectively force
nations to compete against each other for the jobs those multinationals could
provide. The irony now is that it is competition within the single market that
is the great threat, not to wages but to government finances. Once you allow
freedom of movement of labour then you undermine the fiscal sovereignty of
individual states. Eventually they become financially non-viable with only the
EU itself being able to levy income tax across the EU and across national
borders. The result will be a push towards introducing a federal income tax and
a federal budget with more loss of sovereignty and democracy at national level.

The result of all this
is that it will become virtually impossible to elect a left wing government
because a left wing government by definition is one that will always want to
intervene in the market, either to prevent economic crisis or to stabilise an
economy that is already in crisis, or to reduce the impact of inequality. All
these interventions will necessarily result in a distortion of the market, and
even though the market is imperfect and may be in crisis, this will be deemed
to be against the rules of the single market. So while you may still be able to
vote for a left wing government, that government will not be allowed to
implement anything that resembles a socialist platform. It will be like voting
for a Labour local council but finding that they still have to implement the
same austerity-driven cuts as would have happened under a Tory administration.
And of course the Greeks have already discovered this. They elected Syriza (twice)
and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into
perspective imagine some of the policies that a future Labour government might
wish to implement to raise extra taxes and tackle wealth inequality: the
mansion tax; a citizen's income, support of key industries (e.g. steel) in
times of external shocks; taxes and controls on intellectual property. All of
these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in
particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the
freedom of movement of people would make it unworkable whereas if eligibility were
based on nationality then immigration would have little or no negative impact.
But under EU rules countries are not allowed to "discriminate" on
grounds of nationality.

The worrying thing is
that the current Labour hierarchy seem oblivious to most of these potential
pitfalls of EU membership. Moreover, by hitching his wagon (and by association
most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a
massive tactical miscalculation. If the electorate votes to leave them he will
have made Labour unelectable for a generation as no-one will trust the party in
government to keep the UK out of the EU. After all who is going to vote for a
pro-EU party and prime minister if the country is negotiating to leave the EU? At
least if a significant number of senior Labour figures (other than the
commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign
then there would be sufficient alternative leadership candidates, or cabinet
members who could be entrusted to lead future negotiations. And even if the
public votes to stay in the EU the Labour party will likely lose significant
votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.